Blog: Consumer Financial Protection Bureau
June 23, 2015
Today we’re taking a look at the Consumer Financial Protection Bureau’s cases against Sprint Corporation (“Sprint”) and Cellco Partnership d/b/a Verizon Wireless (“Verizon”) for mobile cramming. For starters, what does “cramming” mean in the context of consumer telecommunications? In its simplest form, cramming is “the practice of placing unauthorized charges on a telecommunication subscriber's home or mobile telephone bill.”1 Mobile or wireless cramming simply means the cramming was done on accounts for mobile phones and mobile devices (as opposed to land line accounts). That’s allegedly what was going on with the Sprint and Verizon mobile accounts which are at issue in the CFPB’s cases.
Incidentally, while I refer to the CFPB’s cases against Sprint and Verizon, the CFPB wasn’t alone in going after Sprint and Verizon – the Federal Communications Commission and the attorneys general in all 50 states plus the District of Columbia were also pursuing mobile cramming cases against Verizon and Sprint at the same time. You can pull up just about any attorney general’s website in the country and there’s an announcement about these cases. These are significant cases involving millions of mobile phone customers and millions of dollars.
A point of clarification is in order: With respect to these particular mobile cramming cases against Sprint and Verizon (yes, there have been prior cases as to other carriers), the accounts at issue involved “wireless customers who were illegally billed hundreds of millions of dollars in unauthorized third-party charges.”2 In other words, it wasn’t Sprint and Verizon themselves that were imposing these charges on their mobile customers’ accounts. Rather, Sprint and Verizon “operated billing systems that allowed third parties to ‘cram’ unauthorized charges on customers’ mobile-phone accounts.”3 Or, as CFPB Director Rich Cordray put it, “Sprint and Verizon had flawed billing systems that allowed merchants to add unauthorized charges to wireless customer bills.”4 So—at the expense of being repetitive--to be abundantly clear on this point, Verizon and Sprint did not directly engage in imposing unauthorized charges on their customers’ accounts; rather, Verizon and Sprint allowed third party merchants to do this to their – Sprint’s and Verizon’s – customers’ accounts via Sprint’s and Verizon’s billing systems which Spring and Verizon maintained and operated. In the process, according to the CFPB’s Complaints against Sprint and Verizon, Sprint and Verizon allegedly profited handsomely from this arrangement.
Generally speaking, here’s how the typical mobile cramming scenario has played out in the past: “Most consumers were targeted online as they clicked on ads that led them to websites where they were asked to enter their cellphone numbers. Some of the third-party text-messaging providers allegedly tricked consumers into providing their cellphone numbers to receive ‘free’ digital content that instead resulted in extra charges.”5 “Cramming on mobile phone bills typically involves a $9.99 per month fee for premium text message subscription services (also known as ‘PSMS’ subscriptions) such as horoscopes, trivia, and sports scores. Usually, consumers unknowingly sign up for these services via websites, for example when they provided their phone number to receive survey results or enter a contest. In many cases, consumers were not told they were signing up for subscription services that could cost them money.” 6
As for the Verizon / Sprint mobile cramming cases specifically, here’s what happened according to the CFPB’s announcement in May:
- “Consumers use mobile phones to purchase an array of digital products, such as apps, games, books, movies, and music. These purchases appeared as charges on consumers’ phone bills. Wireless carriers collect and process payments for these purchases and control the networks connecting merchants and customers. From about 2004 through 2013, nearly all wireless carriers’ third-party billing involved products called “premium text messages” or “premium short messaging services” because they were frequently delivered by text messages. Sprint and Verizon outsourced payment processing for these digital purchases to vendors, but failed to properly monitor them.
- The lack of oversight by Sprint and Verizon allowed the vendors to have nearly unfettered access to consumers’ wireless accounts. The billing systems for premium messages attracted and enabled unscrupulous merchants who, in some cases, only needed consumers’ phone numbers to cram illegitimate charges onto wireless bills. The charges ranged from one-time fees of about $0.99 – $14.99 to monthly subscriptions that cost $9.99 a month. The companies received a 30-40 percent cut of the gross revenue from these charges.
- Most consumers were targeted online. Consumers clicked on ads that brought them to websites asking them to enter their cellphone numbers. Some merchants tricked consumers into providing their cellphone numbers to receive “free” digital content and then charged for it. Many others simply placed fabricated charges on bills without delivering any goods or communicating with consumers.”7
The CFPB sued Sprint first, filing its Complaint this past December in U.S. District Court for the Southern District of New York (Consumer Financial Protection Bureau v. Sprint Corporation, Case No. 14-cv-09931, S.D.N.Y. Dec. 12, 2014). Sprint filed an Answer in March and, presently, there’s a pending Stipulated Final Judgment and Order. The CFPB’s Complaint against Verizon was filed last month in U.S. District Court for the District of New Jersey (Consumer Financial Protection Bureau v. Cellco Partnership d/b/a Verizon Wireless, Case No. 15-cv-03268, D.N.J. May 12, 2015), which was immediately followed by the parties’ Stipulated Final Judgment and Order on the same date. The allegations in the two Complaints are similar, parallel in some instances. The introduction in the Sprint Complaint includes the following points:
- “From 2004 to December 2013, Sprint charged its wireless customers for unauthorized third-party charges. These charges cost Sprint’s customers millions of dollars each year.
- Sprint unfairly charged its customers by creating a billing and payment-processing system that gave third parties virtually unfettered access to its customers’ accounts. This access allowed third parties to “cram” unauthorized charges onto wireless bills.
- Sprint automatically enrolled customers in its third-party billing system without their knowledge, much less their consent. Many customers were therefore unaware of the unauthorized charges.
- Sprint continued to operate its flawed system despite numerous red flags, such as high refund rates and complaints from customers, law-enforcement agencies, and consumer groups.
- Sprint profited from this system because it shifted the risk to its customers, who had to pay third-party charges under the company’s Terms and Conditions of Service (“Terms & Conditions”). While its customers suffered losses, Sprint retained 40% of the gross revenue it collected for third-party charges, totaling hundreds of millions of dollars.”8
When I glance over the preceding points from the Complaint against Sprint, what leaps out is the allegation that this mobile cramming practice persisted under Sprint’s billing and payment processing system for nine years. The Complaint in the Sprint case fleshes these points out in greater detail but the impression the CFPB seems to want to convey is that it was in Sprint’s financial interest not to be in any hurry to correct the system. As noted above, according to the Complaint, Sprint got 40% of the gross revenue it collected for these third-party charges. Now, to be fair, I’ve got to point out that Sprint’s Answer denies these allegations.
Before we go further, let’s get some quick historical context. Where did this problem begin and how did it get so big? It began as a landline cramming problem in the 1990s and morphed into a mobile cramming problem. The CFPB’s Complaints in both the Sprint and Verizon cases contain the following points in their factual backgrounds:
- “In the 1990s, telephone companies opened their billing platforms to third parties. Although third-party billing transformed telephone carriers into large-scale credit issuers and payment processors, they instituted few, if any, compliance measures to ensure that charges on customer bills were authorized and accurate.
- By the late 1990s, federal and state authorities realized that nearly all third-partylandline charges were fraudulent. In 1998, however, the larger telephone companies convinced government authorities to allow the industry to self-regulate through a set of voluntary guidelines.
- Unauthorized billing not only persisted, but grew after self-regulation. In 2011, the Federal Communications Commission estimated that each year 15-20 million households were harmed by landline cramming. A 2011 report by the Senate Commerce Committee’s staff concluded that about 300 million third-party charges appeared on landline bills each year, totaling more than $2 billion annually.
- Despite common knowledge that this system invited unauthorized charges, [Sprint and Verizon] replicated the landline, third-party model—outsourcing compliance and billing functions to billing aggregators without adequate oversight—in its wireless business” 9
Both of the CFPB’s Complaints say that complaints from the customers of Verizon and Sprint, spanning several years, describe how the customers were victimized by such schemes. The customers complained that Verizon and Sprint often failed to respond or respond adequately to their customers’ complaints and, further, that Verizon and Sprint failed to provide full refunds for the fabricated charges.10 The allegations in the CFPB’s Complaints against Verizon and Sprint detail how both Verizon and Sprint “unfairly” (to use the CFPB’s characterization) charged their customers by doing the following:
(i) automatically enrolling their customers in third-party billing without their customers’ consent;
(ii) exercising inadequate compliance and controls over their “merchants;”
(iii) exercising inadequate compliance and controls over their vendors (third party vendors called “billing aggregators” who handled Verizon’s and Sprint’s compliance and payment-processing functions);
(iv) failing to respond to their customers’ complaints;
(v) failing to heed red flags.11
A few of the more glaring allegations, included in both of the CFPB’s Complaints against Verizon and Sprint, include the following:
- “Many times, merchants simply crammed fabricated charges onto [Sprint’s and Verizon’s] bills without sending any communications or delivering any products to customers. The unauthorized charges often continued undetected for many months.
- [Sprint and Verizon] ignored, or consciously avoided, numerous red flags highlighting the significant flaws in [their] third-party billing system.” 12
And some glaring allegations in the CFPB’s Complaint against Sprint specifically, under the subsection entitled “Failure to Heed Red Flags,” include the following:
- First, it did not track customer complaints about unauthorized charges. Sprint therefore declined to employ a basic mechanism that could have helped reveal the flaws and risks in its system.
- Second, in 2010, Sprint settled a law-enforcement action related to wireless cramming with the Florida Attorney General.
- Third, Sprint continued to outsource payment processing and compliance to billing aggregators after those aggregators agreed to pay claims pursuant to wireless-cramming settlements in 2008 to 2010.
- Fourth, refund rates for certain merchants ranged from 20-50%. Though extremely high, those rates likely understate the problem because many customers never learned about the unauthorized charges, and when they did, Sprint often refused to give full refunds.
- “Despite the high refunds rates for certain merchants, Sprint rarely terminated their access to its customers and billing system. Rather, after several years with limited compliance measures, Sprint devised a system of financial incentives and penalties to encourage billing aggregators to keep refund rates below certain thresholds. Because billing aggregators received more money if merchants generated more charges, they had an incentive to increase transaction volume, while hiding unauthorized charges to keep refund rates below the thresholds.”13
Under the subsection of the Sprint Complaint entitled “Sprint Transferred the Risk and the Harm to Consumers,” the Complaint alleges:
- “Sprint’s Terms and Conditions did not differentiate between its own charges and those of third parties. Non-payment subjected customers to potential late fees, service termination, collections, and reporting to credit bureaus. Customers had to pay unauthorized third-party charges unless Sprint elected to provide refunds, which it often did not.” 14
And the Verizon Complaint, under the subsection “Verizon Transferred the Risk and Harm to Customers,” alleges the same thing:
- “Verizon’s Terms and Conditions did not differentiate between first-party and third-party charges. Non-payment subjected customers to potential late fees, service termination, collections, and reporting to credit bureaus. Customers had to pay unauthorized third-party charges unless Verizon elected to provide refunds, which it often did not” 15
The message of both Complaints is that Sprint’s and Verizon’s customers, when they came across these unauthorized third party charges, were under pressure to simply pay them and move on, otherwise they faced billing penalties and potential pings to their credit.
OK, let’s cut to the chase: Here’s the financial cost to Verizon: In the CFPB’s case against Verizon, the May 12, 2015 Stipulated Final Judgment and Order provides that Verizon will provide refunds of at least $35 million not to exceed $70 million to all of its customers entitled to refunds (the Order was signed by the Judge on May 14 and entered June 9th.)16. Under this Order, if Verizon hits certain benchmarks in refund payments, it may be entitled to some credits. As for the cost to Sprint: The proposed Order as to Sprint has not been entered as of the date of this blog entry though there is a pending motion to approve the Order (Sprint has filed its Memorandum in support of the proposed Order). However, in the proposed Order for Sprint, if approved and entered in its existing format, Sprint is to provide up to $50 million for the purpose of providing redress to its customers.17 So collectively, we’re talking about the potential payment of over $100 million by both Verizon and Sprint.
In both of the Orders, Sprint and Verizon neither admit nor deny any allegations in the CFPB’s Complaints (except as specifically stated in the Orders). And, in both of the Orders, Sprint and Verizon waive their rights to judicial review or to contest the validity of the Orders (for those outside the legal profession, this is typical in a stipulated order/judgment). In both Orders, Verizon and Sprint, going forward, will need to obtain “Express Informed Consent” from a customer before the customer is charged for any Third-Party Charge. Both of the Orders detail requirements for Sprint and Verizon to provide their customers with “Purchase Confirmation for Third-Party Charges,” and, further, outline how Verizon and Sprint are to deal with their customers when their customers contact them about Third-Party charges. In summary, Sprint and Verizon have to exercise greater oversight over their billing systems, make sure their customers provide informed consent for any third party charges, and respond meaningfully to their customers’ complaints or requests for information about third party charges. For Verizon and Sprint customers who think they may be entitled to refunds for mobile cramming, the May 12, 2015 announcement on the CFPB’s website has links to sites and phone numbers for Verizon and Sprint customers to submit requests for refunds and/or obtain information.18
A couple of points to end on: Sprint and Verizon aren’t the first to get popped for mobile cramming (as noted above, Sprint previously had to settle with the Florida AG in 2010 for mobile cramming claims). Last year, the Federal Trade Commission (along with the attorneys general in all 50 states and D.C.) went after both T-Mobile and AT&T for mobile cramming. The FTC’s December 19, 2014 press release relating to the T-Mobile case states that”
- “T-Mobile has agreed to fully refund its customers for unwanted third-party charges it placed on their phone bills, a practice known as mobile cramming, paying at least $90 million to settle a Federal Trade Commission lawsuit filed earlier this year. In addition to the full refunds T-Mobile is providing, which will resolve the FTC’s lawsuit if approved by the court, T-Mobile is paying $18 million in fines and penalties to the attorneys general of all 50 states and the District of Columbia and $4.5 million to the Federal Communications Commission.” 19
And the FTC’s October 8, 2014 press release relating to the AT&T case includes the following:
- “As part of a $105 million settlement with federal and state law enforcement officials, AT&T Mobility LLC will pay $80 million to the Federal Trade Commission to provide refunds to consumers the company unlawfully billed for unauthorized third-party charges, a practice known as mobile cramming. The refunds are part of a multi-agency settlement that also includes $20 million in penalties and fees paid to 50 states and the District of Columbia, as well as a $5 million penalty to the Federal Communications Commission.” 20
Finally, I find it interesting that it was the FTC that led the charge against T-Mobile and AT&T last year. And then the CFPB and the FCC were the agencies that went after Sprint and Verizon in the subsequent mobile cramming cases. Initially, I was wondering whether that might mean, going forward, that the CFPB will be the agency tasked to lead the charge against telecommunications companies in future cases where consumer claims are involved. However, just last week, the FCC announced that it plans to fine AT&T Mobility, LLC $100 million for “misleading its customers about unlimited mobile data plans.”21 So, at least at this point, I don’t think the CFPB will have a monopoly pursuing and enforcing cases against telecommunications companies that have consumer violation components at their core. Looking at the various agencies’ press releases, it looks like there’s enough to keep everyone busy for the time being.